Equity Market Overview
The 3rd quarter of 2014 trended in monthly directional movements both upward and downward but at the end of the day (quarter) major US indices were little changed from that of the end of the prior quarter. A July selloff followed by a steady August rally and a mixed September left major stock indexes just slightly up from where they were at the end of the June. Year to date, the DJIA is only up 2.81% while the broader S&P has advanced by more than double that mark at 6.70%. The tech heavy NASDAQ (which includes Apple) began the year at the 4,176.59 level and closed the quarter at 4,493.39 with a 7.6% return year to date and a 1.93% advance during for the quarter. The Russell 2000 has been lagging other major domestic indexes and is still under water in 2014 at (-5.32%). The top story of the 3rd quarter on the equity front centered on the Chinese consumer tech behemoth Alibaba Group Holding’s (BABA) listing on the NYSE. The successful (largest ever $25 billion IPO) and subsequent tight trading range suggests that risk appetite of current market participants is alive and well. It also suggests that the world is technologically getting more integrated and the lines are blurring between the “disrupters” of developed and emerging markets.
US$ on the move
A resurgent US dollar up 8% against the Yen and Euro during the third quarter sent the early year gold rally to reverse. An appreciating dollar has the potential to make US equities and bonds more attractive to foreign investors, who would ultimately benefit from currency translation gains. The recent movement of the US dollar suggests that US markets may be the best place to be for the remainder of 2014.Gold declined by nearly 8% during the quarter closing at $1,207.80per ounce. A year ago gold settled at $1,326.00. Gold is nearly 1/3 cheaper than it was just 2 years ago. The price of WTI Crude oil also declined by over 13% during the quarter from $105.37 to $91.36 despite continued and escalating geo-political turmoil in the Middle East and Ukraine. Since WTI oil is priced in US dollars it makes sense that the stronger dollar is able to buy more quantities for the same dollar. MLP’s rebounded from a July sell off with a slight quarterly increase however the sector has advanced almost 16% thus far in 2014.
International markets remained mixed. Emerging markets located in Southern Asia and India were the best performing markets internationally while the developed or advanced markets of the Euro zone (Germany France Italy) and UK traded down. Japan’s equity markets improved as a consequence of favorable simulative policies. International developed markets and emerging markets declined by ( -6.39%) and (-4.33%) respectively during the 3Rd Quarter.
Fixed Income Markets
The 10 year treasury was virtually unchanged during the quarter with a tightening yield of 2.51%. at September 30th. Longer term yields compressed slightly as well to 3.21% from 3.36%. With the Fed’s tapering program expected to be completed next month, there is some consternation as to whether the private sector will be able to hold up the mortgage backed security market and whether asset pricing will be subject to serious widening. In its Federal Open Market committee meeting last week, The Federal Reserve maintained its commitment not to raise rates for “a considerable time” even after the purchase program concludes.
Bond King Moves
The biggest story in fixed income was that Bill Gross formerly of PIMCO (now owned by Allianz) moved his bond picking acumen (and general workplace bad behavior) across town (Newport Ca.) to a new welcoming home at Janus. This move could add some volatility to the fixed income markets in the 4th quarter as investors weigh their options.
We are Moving
Not very far…just across the lobby – stage left! Please do drop by for a visit!